You may be able to deduct contributions to a health savings account (HSA). These tax-free savings accounts can be used to pay for medical expenses incurred by you, your spouse or your dependents. They are used in conjunction with high-deductible health care plans (HDHPs), where your basic health insurance does not cover first-dollar medical expenses.

HSAs may be established by anyone who is covered by an HSA-qualified HDHP, is not covered by any other health insurance and is not enrolled in Medicare. Qualified HDHPs must have an annual deductible of at least $1,650 for self-only coverage and $3,300 for family coverage in 2025. These amounts are indexed to inflation and will rise to $1,700 and $3,400, respectively, in 2026.

Starting in 2026, bronze and catastrophic plans on the Affordable Care Act (ACA) marketplace are eligible for health savings accounts. ACA plans in other categories may also be eligible, depending on their deductibles and out-of-pocket maximums.

Tax-deductible contributions can be made to the HSA up to a maximum of $4,300 for self-only coverage and $8,550 for families in 2025. In 2026, the maximum will increase to $4,400 for individual coverage and $8,750 for family coverage. If you are over age 55, you can also make a catch-up contribution to your account of up to $1,000 and still enjoy the same tax advantages.

Individuals can also make a one-time transfer from their individual retirement account (IRA) to an HSA, subject to the contribution limits applicable for the year of the transfer.

Contributions to HSAs can be made by you, your employer or both. You can fully deduct your own contributions to an HSA, even if you do not itemize, and contributions made by your employer are not included in your taxable income. The interest and investment earnings generated by the account are also not taxable while in the HSA.

Amounts distributed from the HSA are not taxable as long as they are used to pay for qualified medical expenses. They can be used to:

• Cover the health insurance deductible and any copayments for medical services, prescriptions or products;
• Purchase over-the-counter drugs (a doctor’s prescription is no longer required to deduct over-the-counter medication), menstrual care products, and long-term care insurance and expenses; and
• Pay health insurance premiums or medical expenses during any period of unemployment.

Amounts distributed that are not used to pay for qualified medical expenses will be taxable, plus a 20% penalty will be applied.

HSAs are similar to IRAs in that they are owned by individuals—you are not dependent on a particular employer to enjoy the advantages of an HSA. And if you change jobs, the HSA goes with you.

What if you already have an existing medical savings account (MSA)? In that case, you can either retain it or roll the amount over into a new HSA.

See “Health Savings Accounts” in the July 2016 AAII Journal for more about HSAs.

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